The American Chamber of Commerce in Shanghai has released a new study that shows companies that view China as both a source of lowercost labor/products as well as a growth market, and integrate these operationally, are much more profitable than companies focused on only one of these items.
The study shows (taken from press release):
• Operations management is a factor: The study found that three out of four companies lack fundamental best practices in their China operations, including integrating the dual functions of export platforms and domestic market penetration. Survey respondents cited a number of best practices that have yet to be fully applied in China. Just 11 percent reported fully applying integrated planning systems such as enterprise resource planning (ERP) software and material requirement planning (MRP). Even fewer companies – only 7 percent – had fully deployed analytical inventory calculation tools and processes, and 4 percent employed best practices for supply chain risk management.
• Declining competitiveness: More than half, or 54 percent, of companies surveyed believe that China is losing its competitiveness to other low-cost countries. Seven out of 10 respondents cited the rising renminbi as a major reason for China’s decline, while wage inflation was cited by 52 percent of those polled. Wages for white-collar managers and blue-collar workers have jumped 9.1 percent and 7.6 percent, respectively. Staff retention is also a major concern, with 33 percent of respondents citing it as a reason for lost competiveness.
At the same time that costs are increasing, China is lagging behind global standards in many operational dimensions, most notably in logistics infrastructure, trade environment, access to technology, management capabilities, and protection of intellectual property.
• Companies eyeing Vietnam and India: Nearly one in five companies surveyed (17 percent) say they have concrete plans to relocate at least some of their China-based operations to other countries. Although 88 percent of these corporations say that they originally chose China for its lower labor costs, they are finding that cheaper labor and tax benefits have made alternative locations more attractive. Among these corporations, Vietnam is the top alternative to China, according to 63 percent of this group, while 37 percent say India is their first choice. Among all respondents, when asked to compare China to alternate countries, they cited lower labor costs in those other countries as the largest differentiator, at 3.7 out of a scale of 5, indicating that China’s reputation as a source of cheap manufacturing labor is diminishing. However, the alternative countries lag China in market potential and infrastructure.
• Majority staying in China: Despite the rising costs of manufacturing in China, 83 percent of manufacturers said they will maintain their operations in the country. China’s vast domestic market was cited by 78 percent of respondents as the reason to maintain the status quo, while 39 percent were unwilling to establish a new supply chain, motivating them to remain in China.
While a stronger Chinese currency and rising wages were putting pressures on manufacturing margins, failures to deploy operational best practices and to fully leverage China as both a growth market and source of labor and products are also limiting profits.
This information is part of AmCham Shanghai’s 2007 CHINA BUSINESS REPORT, developed with Booz Allen, that provides an assessment of the current operating environment for U.S. companies in China.
For those businesses in need of truly understanding as well as applying strategic sourcing practices, I would strongly suggest you speak with consultants such as Alaris Consulting as they specialize in strategic sourcing and supply chain efficiencies. I would say that this should be an easy decision for any company with a medium/long-term view on China especially if it can significantly increase your profits!
